Finance | 7 January 2021

The Debts You Didn’t Know You Had

by Carlisle Homes

Preparing for your home loan application? Here are some tips on how to tidy up sneaky debts and be on your way to owning your dream home.

When you apply for a home loan, lenders want to see that you’re a responsible borrower. To that end, you can expect your income, assets and liabilities to come under scrutiny. They’re looking to see whether you live within your income and meet your obligations on time.

As part of the loan application process, you’ll be asked to provide details of your spending, and a list of your debts. The bank wants to know about debts because these compete with the mortgage. If you hit hard times, which one will you choose to pay first?

But while most people recognise that a credit card or personal loan are debts, there are others that you might not spot. These sneaky debts might be the difference between getting your loan approved or not. If possible, try and pay them off before putting in your loan application.

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Debts can come in all forms and sizes so it’s important to keep an eye on them, or pay them off, before you prepare for your home loan application.

Three types of debt you might not realise you have

1. Interest-free periods on white goods and furniture

If you’ve bought a sofa or a fridge from a big box retailer, you’ll be familiar with these offers. They provide a way to buy large items without having to find the money upfront.

They require you to enter into a contract, which sets out minimum monthly repayments. If the balance is not paid off by the due date, a high interest rate applies. Because there’s no interest in the meantime, it’s easy to forget that this is a debt. But lenders feel differently. Not only is it a liability that will need to be paid, it can also be a sign that you’re not able to save up for things ahead of time.

2. Afterpay or Zippay

You want to buy that new pair of shoes or the headphones everyone’s talking about. But it’s not quite payday yet. Enter: the modern solution to lay-by.

Afterpay and Zippay allow you to take home your items now and pay for them in four fortnightly instalments. As long as you pay up on time, there are no fees or interest. There are no hidden traps here — unless you’re applying for a home loan.

Carrying short-term consumer debt in this way is a big red flag to banks. It tells them that you’re unwilling to delay spending until you have the available funds.

3. Car leases

If you’ve taken out a personal loan to buy a car, you’ll probably recognise this as a fairly traditional form of debt. Where car leases get tricky is when they’re structured to come straight from your salary. This is known as a novated lease, or salary sacrificing.

There are significant tax advantages to doing it this way, because part of the payment is deducted from your pre-tax salary. And because the money is taken out before you get paid, you don’t have to budget for it in your paycheque.

The problem comes in when you forget that it’s even there. Your lender will include this as an ongoing debt and weight it against your income as part of the assessment. If you don’t include it, they might think you’re trying to hide information.

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Go through your debts with a fine-toothed comb and disclose all liabilities to your lender to avoid the risk of having your application declined.

Why it’s important to disclose everything upfront

Comprehensive Credit Reporting allows banks to share information with one another. If you’ve missed a credit card payment with one institution, the others will be able to see the issue. Likewise, even those ‘sneaky’ debts will show up on your statements.

Even if you have a deposit saved and money left over at the end of the month, carrying hidden debt can count against you. If you’re planning to apply for a home loan, go through your finances with a fine-tooth comb. Any small debts should be paid off, and the rest disclosed.

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It’s never too early to start preparing for your home loan application to rectify any spending habits that may risk your chances of getting approved.

Start planning early for a stronger application

Planning early can make all the difference in whether you’re successful in getting your home loan approved. If you need extra help, talk to a mortgage broker. They’ll be able to advise you how to make your application stronger.

Once you’ve got your pre-approval, have a look at Carlisle Homes’ fixed price house and land packages and choose the dream home that fits your budget!

For more information, speak to one of our in-house construction finance specialists on how to get into your new dream home faster.

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